Companies forget that they pay wages; don’t understand complexity of economy

Apparently 68 out of the top 100 retailers are concerned about flat or falling wages. Huffington Post did some poking around their 10-K forms and aggregated the top risks for the top 100 retailers. Huffpo found that low spending, unemployment, and falling or flat wages were the top 3 items. To me this is really interesting. Apple was recently identified as part of a wage fixing scheme that looks like it could have cost employees something on the order of $3.2 Billion, Wal-Mart has cut hours of their employees as to prevent themselves from paying for ObamaCare for those employees, which means that those employees have to pay for their insurance out of pocket, as they have to insurance now.

All of these things together impact the web of our economy. What we’re seeing is local optimization which leads to sub-optimization of the entire system. Companies that are cutting wages or benefits to maximize their profits are likely taking a cut out of their own revenue stream. It’s likely that many Wal-Mart employees shop there because it’s the lowest priced place in most areas for most goods. The fact that WinCo is Wal-Mart’s largest threat now, is pretty indicative that wages are falling.

When Henry Ford raised the wages of his employees to a real living wage, it wasn’t out of kindness or some perceived social good. It was so that his employees could buy his car. If a large mass of people are unable to buy a good you produce because of your own wage policies you’re creating a problem for yourself. Furthermore, economies are networks, they interact with each other. Each and everyone of those employees would then become representatives for the Ford brand and be able to show off the good they were manufacturing. With every new employee hired, Ford knew that there would eventually be one more sale.

Companies today have clearly forgotten this. Retail is one of the largest segment of our economy, with a huge number of employees. If this entire swath of our population cannot afford to buy consumer goods, then it’s likely that we’re going to be continually be at risk for another recession. People buying stuff is what keeps our economy going. If the companies that staff the most people do not pay them well enough to keep buying stuff beyond food, then we’re at a great risk.

Wages are a very difficult thing. There’s a Socialist party in Seattle that’s trying to get minimum wage up to $15, but offered a job starting at $13/hour. Employees have gone on strike to get higher wages. I’ve written about it several times, however, whenever companies are indicating that low wages are a risk to their business, it’s time for them to start looking in the mirror. There are large retail industry groups, these groups should start to investigate the root cause of these risks and propose recommendations to address these concerns.

Should the Fed look to take action to protect the companies from themselves in order to protect the economy? Should the minimum wage be increased to address the problem? Should the government take action at all, it’s the businesses fault if they fail because they didn’t pay their employees enough. What do you think?

Inequality, is the attention going to drive change?

In the last few weeks there has been a huge amount of focus on inequality. The attention has been riding a bit of roller coaster since the Great Recession started in 2008 when the focus was on Occupy Wallstreet and the inequality because of the action of the bankers. However, Elizabeth Warren began to really shift the conversation away from just inequality to the total system that enables the inequality. In fact, she started to argue that our minimum wage wasn’t keeping up with the rate of productivity of the economic system. As I argued in my piece on Minimum wage there’s not much impact on local jobs comparatively to the theories that minimum wage increases would dramatically increase unemployment.

However, Wal-Mart and McDonald’s brought the conversation back to the fore through the food drive for Wal-Mart employees that couldn’t afford food for Thanksgiving. According to many theories of efficiency to maximize profit Wal-mart must continually drive lower costs through less employees doing more. However, there’s been some negative repercussions to this beyond the extremely low salaries for the majority of employees, it’s also impacted the stocking of shelves which can reduce sales. Wal-Mart’s salaries and behaviors have caught the attention of professors at Harvard, recently there was an HBR Blog post about Wal-mart’s food drive – I strongly suggest reading that article. It provides great perspective about the impact of low salaries. Essentially, if the bulk of Wal-Mart employees work full time at $7.25 per hour they are well below poverty line, which means that these employees would end up getting food stamps. Employees with a family of 4 need to make at least $15/$16 per hour to be above the poverty line. That gap of $7.75 that provides food stamps and medicare for these employees. The author is arguing that these government benefits aren’t purely entitlements for minimum wage workers, but also entitlements for the companies as well.

Of course HBR isn’t the only place arguing that inequality is a serious problem. Paul Krugman, the Pope, and the recent article in the Guardian (that I wrote about in Taking the Long View) are as well. Paul Krugman arguing this isn’t exactly surprising, he’s been arguing that inequity and the result of the recession has had massive negative impact on the economy. The long term under employment of workers is continuing to cause damage to our economy.

The real question is will this conversation actually drive any change? Will we see any change in policy? There has been some recent shifts in the republican perspective of the budget. Which may actually relax the demands on cutting unemployment and other “entitlements.”  Studies have shown that every dollar spent on unemployment adds about $1.64 into the economy. So this is something that will likely have a positive impact on the economy, if we do some different thinking about what we’re spending money on. That being said, I’m very skeptical that in our current state of politics that we’ll see any serious change in how to treat economic inequity in terms of changes in tax policy which can reduce inequality.

I think that at this point it would require a serious popular swing in opinion to drive the change through the elections. In most states that are negatively impacted by inequality, this is an unlikely occurrence as they are republican strongholds.

What can we do about inequality? Well, if you’re an employer work to make sure you pay fair wages. As a consumer we can make choices to buy products at locations that provider higher wages and access to benefits – we can also chose to boycott companies that do not pay a living wage. As I explained in my article about health costs, proper healthcare reduces quality of life and reduces inequality. As a employee of a company that pays low wages, you can work to ensure all employees that work for you receive a living wage through salary increases or other support. This won’t drive systemic changes though and if we want those we’ll have to work through contact our political leaders to drive change. Without these choices we will not see changes and will continue to have inequality. This inequality will likely only get worse over the next several years.